Results of DNB investment surveys into alternative investments by pensionfunds

Date 26 June 2012

In 2011, within the scope of thematic supervision, De Nederlandsche Bank (DNB) conducted investment surveys at various pension funds into the policies and control environment in respect of alternative investments. Alternative investments refers to a wide range of investment categories including for example private equity, hedge funds and infrastructure. Alternative investments are usually associated with a large degree of complexity, higher management costs and a lack of liquid and transparent market prices. Therefore, these investments set high requirements for a pension fund's policies and control framework.

DNB welcomes the sector´s on-going effort to improve its control environment. On the basis of experiences in ongoing supervision and the results of the surveys, DNB nevertheless finds that the risk management level not always corresponds to the complexity of the investments. It therefore remains essential for pension funds to further tighten the policies and control environment related to alternative investments.

DNB is aware of the major differences between pension funds in terms of their investment policy. The investment surveys of the past twelve months have nonetheless resulted in several sector-wide points for attention in relation to alternative investments. These can be outlined as follows.

  • Many pension funds lack sufficiently detailed strategy and investment guidelines with respect to alternative investments. Moreover, the added value of alternative investments in the portfolio is not always sufficiently substantiated.
  • Some pension funds lack a proper and predetermined selection procedure for alternative investments and asset managers. In addition, the functioning of the investment advisory committee, external asset managers and fiduciary managers is not always evaluated periodically.
  • The reports which pension funds receive from fiduciary managers or asset managers often contain insufficient detail on performance and risk attribution.
  • A considerable number of pension funds lack a clear division of roles and recording of duties and responsibilities of the various bodies in the investment process, including the pension fund board of trustees, the investment advisory committee, the external advisers and asset managers.

DNB has informed pension funds about the generic results of the survey by letter on june 22nd. The purpose of this letter is to provide guidance to the pensions sector and to promote the development of good practices. The letter is availabe for download below.